It's been seven years since Google (Nasdaq: GOOG) left the realm of private companies and entered into the stock market, selling stock to the public through an Initial Public Offering (IPO) was the biggest technology deal of the decade, and helped to erase the painful memories of the dot.com era.
A few years later, Youtube.com promised to be the next blockbuster IPO, only to be swallowed up by Google for a hefty $6.8 billion before any IPO could take place. Since then, investors have had to sit idly by as a wave of fresh young new companies captured a great deal of buzz. Facebook is the poster child for these new 'social media' companies, and there are now a half dozen niche players following in Facebook's wake. Later on this year, some of these companies may take the plunge and pull off their own IPOs. And the numbers being discussed are so large that we may just be entering another mania. Recall that the dot.com mania didn't end so well.
Why all the buzz over going public? Most companies take the plunge in order to raise money (which allows them to grow). To do this, the company issues shares to the open market. In most cases, the offering, called an initial public offering (IPO), makes the company's stock accessible to a large group of public investors for the first time. [To read more about the difference between public and private companies, read Flip Flops: Going from Public to Private.]
Facebook's Valuation: $60 Billion (With a B)
When Facebook received a $300 million capital injection in 1999 from Digital Sky technologies, the social media pioneer was valued at hefty $10 billion. Nowadays, as investment bankers circle overhead, hoping to snare a piece of a potentially hot IPO, Facebook's valuation is said to have soared to $60 billion. That's billion, not million.
It's fair to ask what $60 billion gets you. Well, we know that Facebook is extremely popular and has a massive and loyal customer base. But we don't know if Facebook is actually a money maker. Google, with its impressive search engine, at least had $3 billion in annual revenues by the time it came public. (Sales hit $29 billion in 2010).
Investors are apparently willing to pay more than twice as much for a Facebook IPO ($60 billion vs. $23 billion for Google), even though Facebook likely lacks Google's clear revenue model. Facebook investors are hoping that the company's massive customer base can be 'monetized,' which is a nice way of saying Facebook customers will either watch a lot of ads or start to pay fees for various services.
The Next Wave
Facebook may not even be the first one to walk through the IPO gate. A raft of other companies are starting to talk to investment bankers, including:
Groupon. This three year-old company has caught on fast, and its base employees gave swelled from around 100 in late 2009 to a current 6,000. This is clearly a more understandable business model than Facebook, as Groupon profits from every transaction that takes place. The company has reportedly been profitable almost since its inception. But does that mean that the business should be worth $25 billion (more than Google's 2004 price tag), as rumors suggest? After all, a host of imitator sites are gaining fast, including an effort led by Google (Google Offers), and Groupon's future success is hardly guaranteed. Recall that Myspace.com appeared to be the hot new business five years ago, and is already an also-ran.
LinkedIn. This site, a sort of Facebook of the corporate world, filed to conduct an IPO in late January, and a deal may come this spring. Sales are zooming ahead, from $80 million in 2009 to more than $200 million in 2010, with most revenue coming from job listings and advertising. The company has 90 million registered users, although they spend much less time on the site than Facebook users do.
Why the Hurry?
All of these companies have an ample amount of cash on hand and really don't need to pull off an IPO. So why bother? Because investors appetite seems very strong for these kinds of businesses right now. If they wait another year or two, the potential deal value may fall.
Zynga, a developer of popular online games such as Farmville and Cityville refuses to panic. That company has largely ruled out an IPO in 2011, preferring to keep growing without the scrutiny that comes from being a public company. Besides, when an IPO takes place, the clock starts ticking on what's known as a 'lock-up expiration.' Six months after any deal, key employees finally get the green light to sell their own stock, and when that happens, an employee exodus may occur. (A Zynga deal would have likely valued the company at around $6 billion, according to the New York Times).
Yet there is one very good reason to go public: Companies can more easily make acquisitions, doling out new shares to exchange for other properties to help maintain growth. In some instances, it's not just the business being acquired, it's the employees that come with the deal. A number of Google's most valued employees have joined the company through acquisitions.
You can't blame investors for wanting in on the action. After all, a $10,000 investment in Google's IPO in 2004 is now worth more than $55,000. Trouble is, these companies aren't Google. And with the exception of Facebook, it's not clear if any other of these new social media plays can stand up to rising competition. If you really want in on these stocks, you may want to see if shares fall back to earth after the IPO has been completed.
